College costs are soaring, and the job market remains tight, creating opportunities for companies that offer low-cost--or free--education and skills training via the Internet. You will face a new wave of start-ups that's a far cry from the diploma mills that have drawn scorn from accreditors; several boast executives from top universities, like Stanford. But it may take time for new startups to prove their worth to employers and students. Also, universities such as Harvard and MIT are developing their own initiatives.

Online schools aim for prestige

Online education companies once made their names on providing a cut-rate alternative to traditional colleges and universities. But the latest crop of education tech startups aims to open up the halls of elite academic institutions to anyone with an Internet connection. One emerging category in the industry is massive open online courses, or MOOCs, which make the course catalogs of universities like Stanford and Duke available to the public--though typically not for credit. Leading the way in this space are Coursera and Udacity.

Other companies are taking alternative approaches to providing elite educational experiences online. 2U, whose founding team includes former executives of Hooked on Phonics and the Princeton Review, partners with select universities to translate their curricula into an online format while preserving their admissions structures. Another entrant, the Minerva Project, is attempting to build an online-centric university that will surpass the likes of Yale and Oxford in quality and prestige, at a fraction of the cost.

There still remains a healthy market, however, for online education companies geared toward practical skills. In recent years, much attention has been focused on software development, with companies such as Codecademy, General Assembly, and Treehouse offering classes in computer programming. Another company, Skillshare, specializes in project-based classes in creative disciplines, such as photography, graphic design, and culinary arts.

The online education market hit $91 billion last year, according to the investment firm IBIS Capital, and is projected to top $256 billion in 2017.

How to stand out

Lately, many online education companies have turned their attention to supplementing traditional, brick-and-mortar classes rather than replacing them. 2U has established a program called Semester Online, which aims to let college students to pursue non-academic projects, such as internships abroad, while maintaining a full course load. New teaching approaches have brought increased demand for educational technology. For instance, the rise of the "flipped classroom," in which students receive lectures at home rather than in class, presents opportunities for companies offering educational video.

One goal that remains elusive in the industry is lowering the cost of instruction, which has risen 84 percent since 2000, according to IBIS Capital. Though the Internet has the potential to reduce long-term operating costs, so far, the sticker prices of online degree programs--including those offered by 2U--remain similar to those of traditional campus programs. The yet-to-be-launched Minerva Project is setting its tuition at $10,000 a year, but there remains ample room for other low-cost competitors.

Skills needed to get ahead

Tech savvy, of course, is a requisite for building online platforms, especially ones that can support the needs of thousands--or potentially millions--of students across age ranges. Though ed-tech startups often explicitly seek to dismantle traditional educational structures, it helps to have industry veterans both to design effective course content and to navigate issues such as licensing content from universities. Both Udacity and Coursera boast academics on their executive teams.

Having a talent for social engagement is also important. In order to gain legitimacy, educational platforms must offer proof of their students' success in applying their newly acquired skills. Skillshare, for instance, regularly contacts former students and posts their success stories on its blog. Additionally, companies whose courses do not allow students to earn formal credits, degrees, or certification must find alternative ways to keep them motivated. Codecademy and Treehouse take a gamification approach: they award virtual badges to students when they learn new skills.

Funding is plentiful

Interest in online education among investors has spiked in recent years. The past year has seen mammoth investments for new startups such as Coursera, which raised about $65 million in its first year of existence, as well as longtime players such as the educational video site Lynda.com, which raised a first-time round of $103 million. According to the venture capital database CB Insights, the educational tech industry attracted $1.1 billion in investment last year.

Online education companies benefit from having a diverse pool of funding sources available to them, including grants. The education field at large has drawn capital from several entrepreneurs, including Bill Gates and Mark Zuckerberg. Traditional schools represent another growing source of funding. The University of Pennsylvania, for instance, recently partnered with a group of companies to launch an incubator and $2.1 million seed fund for educational technology startups.

Challenges

Today's online education startups have escaped the negative reputation of for-profit colleges like the University of Phoenix, but they are still waging other battles for legitimacy. MOOCs face a particularly difficult challenge: very few of their courses yield official credits, which limits their value. And recent attempts at offering course credit have produced less-than-stellar results. Udacity opted to put its program with San Jose State University on hiatus after more than half of participating students failed the program's initial courses.

Another challenge may come from existing colleges and universities, more and more of which are beginning to develop their own online programs. For instance, a consortium of universities, including Harvard, Caltech, and the University of Texas system, has developed edX, a non-profit MOOC. Other universities, such as Carnegie Mellon and Yale, make videos and instructional materials for many of their courses available through their own branded portals.

So far, online education companies have found most success in emphasizing skills-based learning. Udacity, for instance, has worked with companies such as Google and AT&T to train current employees and identify potential job candidates.

The Quick and Dirty on Online Education

It's about content

The content segment of online education could hit $72.9 billion in 2017, according to researcher MarketsandMarkets.

You won't be first

Watch out for for-profit big boys Kaplan and Apollo Group, the parent company of the University of Phoenix, as well as educational heavy-hitters such as Harvard and MIT, which are developing their own online courses. Newer entrants include 2U, Coursera, and the Minerva Project, among many others.

VCs are intrigued

Venture capital shops New Enterprise Associates and Accel have made recent investments. So has Apollo Group.